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06/01/2017 / By Ethan Huff
If you’re a working employee contributing to a pension fund for your future retirement, your contributions could be getting spent on payouts to current retirees rather than invested as they should be for your eventual use. That’s because pension funds tend to function more like Ponzi schemes than actual retirement programs, benefiting those who contribute early at the expense of those who contribute later.
It’s a problem both in the public and private sectors, and one that’s going to hit the current workforce like a ton of bricks once the chickens come home to roost. Underfunded pension obligations in the public sector alone already top $5 trillion, and the situation is only getting worse as benefit payouts increasingly outpace contributions – meaning that by the time it’s your turn to start getting paid for your retirement, there’s a good chance that there won’t be any money left to disburse.
The infamous Bernard Madoff scandal is a perfect example of what happens when investors get caught in the pension Ponzi scheme. Instead of taking some $65 billion in investor money and actually investing it, Madoff used the money to fund massive redemptions owed to current recipients, of course skimming some of it for himself in the process. He was eventually caught and charged for his crimes, for which he is now serving a 150-year prison sentence.
But most pension scams probably won’t have this same outcome because, believe it or not, they’re technically legal even though they constitute institutional theft. Take the Chicago Teachers’ Pension Fund (CTPF), for instance. It currently maintains about $10 billion in assets, but is obligated to provide future payouts of $21 billion. This represents an $11 billion deficit that, according to reports, continues to increase with each passing year.
The CTPF currently has a payout of about $1.4 billion that’s disbursed to retirees as part of their owed benefits packages. But even with $10 billion in assets, the fund still lost $28 million just in 2016, to which it proceeded to pull out another $700 million contributed to the fund by taxpayers. It also skimmed another $192 million contributed by current teachers from their paychecks, which was supposed to be invested on behalf of those teachers.
Just like in the Madoff case, CTPF is extracting money from current pension investors to pay retirees, which isn’t supposed to be how the process works. The contributions of current retirees from way back when were supposed to be invested at that time and used now to pay them. But because there isn’t enough of it to go around, the fund is pulling from other areas, creating a situation in which liabilities become exponentially greater over time.
“…the C.T.P.F. takes money from ‘new investors’ (current teachers) and uses it to fund redemptions (benefit payments to retirees) even though the managers of the fund know that current claims don’t have a chance of ever being paid in full,” explains Zero Hedge.
If it sounds like a scam, that’s because it is. But it’s a legal one that’s going to keep kicking the can down the road until the whole things collapses. Current pension contributors are essentially playing financial musical chairs, and eventually they’re going to be left without a chair when the music stops.
“Of course, like most financial grenades with a huge tail risk, the devastating consequences of America’s failed public pensions will not be addressed until it’s too late,” adds Zero Hedge. “Unfortunately, with ~$5 trillion in underfunded pension obligations in the public sector alone, the pension catastrophe will be too large for even America’s overly generous taxpayers to bail out.”
Follow more news on the coming collapse of pensions across the world at Pensions.news.
Sources for this article include:
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